At the beginning of September, approximately 54 million Americans were receiving Social Security retirement benefits. For numerous individuals, this program serves as their primary source of income during retirement, which underscores its significance and effectiveness as one of the nation’s key social initiatives.
Many legitimate criticisms can be made about this topic. Social Security , yet it should be simple to recognize the financial support it offers to millions.
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Unfortunately, similar to various types of earnings, Social Security benefits are subject to tax rules. However, there's good and bad news for retirees. Let's take a look at both.
Most retirees can avoid Social Security state taxes
The good news about Social Security taxes is that most states do not tax Social Security benefits. Here are the 41 states (and Washington, D.C.) that currently do not:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
The regulations surrounding Social Security taxes at the state level can vary significantly, so if you reside in one of the nine states that presently impose taxes on these benefits, make certain to stay updated on your state’s policies annually as they might evolve. For instance, during 2024, Missouri, Nebraska, and Kansas eliminated their taxation on Social Security.
Sadly, the regulations for federal taxes still come into play.
Now, I have some unfortunate news: irrespective of your state’s particular tax regulations, federal tax laws remain applicable to all individuals. The IRS takes into account your “total income” when determining your tax liability. This encompasses the following elements:
- Adjusted gross income (AGI) Your combined earnings from every source except Social Security.
- Nontaxable interest Interest income exempt from federal taxation, like U.S. Treasury and municipal bonds.
- Half of your Social Security benefits : 50% of your total Social Security benefits for the current year.
After calculating your total combined income, Social Security applies these guidelines to determine what portion of your benefits can be subject to taxation.
| Portion of Taxable Benefits Incorporated into Earnings | Filing Single | Married, Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Data source: Social Security Administration.
Observing U.S. Federal Social Security taxes in effect
The regulations surrounding Federal Social Security taxes aren’t quite as simple as many individuals might hope (typical, right?), so allow me to explain their workings step by step.
Initially, many individuals look at the aforementioned table and believe that their Social Security benefits could face taxation of up to 85%. Fortunately, this understanding is incorrect. These percentages do not indicate the amount subject to tax; they merely show what portion can be taxable. eligible to be taxed.
Imagine you're married and filing your taxes jointly, with these conditions being applicable:
- You and your spouse's AGI is $36,000
- You earned $1,000 in Treasury bond interest
- The total of your Social Security benefits for this year amounts to $24,000.
In this scenario, your total income would amount to $49,000 ($36,000 + $1,000 + $12,000). Consequently, as much as 85%, or $20,400, of your yearly benefits could potentially be subject to taxation.
Social Security will combine the $20,400 with any additional income you earn and apply your standard income tax rate to the total amount. So if you fall into the 22% tax bracket, tax bracket , you would owe $4,488 for the $24,000 in benefits you received that year. This result is far more favorable than owing $20,400.
The deeper your understanding of how Social Security taxes function, the more effectively you can strategize your retirement funds.
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